Taking a Financial Position in Your Opponent in Litigation
American Economic Review, Forthcoming
39 Pages Posted: 17 Feb 2016 Last revised: 27 Jun 2018
Date Written: June 21, 2018
Before filing suit, a plaintiff can take a financial position in a defendant firm. A short position benefits the plaintiff by transforming a negative expected-value claim into a positive expected-value one and by enhancing the claim’s settlement value. If the capital market is less than strong-form efficient, the plaintiff also benefits directly from the decline in the defendant’s stock price. When the defendant is privately informed about the case’s merits, bargaining failures can arise. While aggressive short-selling benefits the plaintiff at the expense of the defendant, moderate levels of short-selling can benefit the defendant and raise the settlement rate.
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